Arbitration:
Challenging the Award: Part VIII
The Importance of a Record
By: Samuel Wampler
Reprinted from January 2006 ohioconstructionlaw.com
What do an ice cream franchise agreement and a construction contract have in common? Very little— unless each of them contains an arbitration provision. This month we will look at what happened when a party to an ice cream franchise agreement challenged an arbitration award entered against it. While this case had nothing to do with a construction dispute, the holding of the appellate court applies equally to any type of contract, whether it be for an ice cream franchise or for the construction of a $100 million facility.
The case is Handel's Enters. v. Wood, 2005-Ohio-6922 (Mahoning App. Dec. 22, 2005), and it is very instructive on the topic of judicial review of arbitration awards. In 1999 Handel granted an ice cream franchise to Wood, based on Wood’s agreement to pay Handel a percentage of sales for 20 years. In December 2001, Wood stopped making payments to Handel, and five months later he sold the franchise location to a third party.
Apparently during this time Handel and Wood were discussing the possibility of Handel buying the franchise location from Wood, but that deal never materialized. Wood’s actions amounted to a violation of the franchise agreement, and Handel filed for arbitration in October 2002.
The franchise agreement provided that “all questions as to rights and obligations arising under the terms of the contract are subject to arbitration,” and that should a “dispute arise under this contract, either party may within 60 days make a demand for arbitration by filing a demand in writing with the other.”
It is undisputed that Handel did not file a demand for arbitration within 60 days from when the dispute arose and Wood objected in the arbitration to the timeliness of the demand. Although a transcript of the arbitration hearing was not provided to the court, it became clear to the appellate court that Wood’s objection was raised in the arbitration. However, the arbitration panel initially ruled (by interim ruling) that Wood had not provided sufficient evidence to support its motion to dismiss the arbitration on the grounds of the untimeliness of Handel’s demand. The arbitration panel indicated that Wood could raise the issue again “once sufficient information is before the panel.”
Unfortunately for Wood, he did not provide any further evidence in support of a dismissal based on Handel’s untimely filing of the demand for arbitration. Moreover, Wood could not provide a complete record of the arbitration proceedings because no transcript was prepared.
The arbitration panel ruled in favor of Handel and awarded a total of $334,899.19 to Handel. Handel sought to confirm the arbitration award, and Wood filed a motion to vacate the award. Part of Wood’s reasoning was that the arbitrators exceeded their powers by ruling on a claim that was filed late and further that enforcement of the award would be contrary to public policy. (Wood argued that the franchise agreement was in violation of statutory requirements, but that argument failed.)
The trial court confirmed the award, and Wood appealed the court’s decision.
In reaching its decision to affirm the trial court’s ruling, the appellate court
announced several important points about reviewing an arbitration award:
“On appellate review, this court is confined to an evaluation of the order issued by the common
pleas court pursuant to R. C. 2711.10. . . . The substantive merits of the award are not reviewable absent
evidence of material mistake or extensive impropriety.”
“Thus judicial review of an arbitration award is ‘very narrow.’”
“An arbitrator’s award carries a strong presumption of validity.”
“The limited scope of judicial review of arbitration decisions comes from the fact that
arbitration is a creature of contract. Contracting parties who agree to submit disputes to an arbitrator
for final decision have chosen to bypass the normal litigation process. If parties cannot rely on the
arbitrator’s decision (if a court may overrule that decision because it perceives factual or legal error in
the decision), the parties have lost the benefit of their bargain.”
Against these guiding principles, the appellate court pointed out that whether the claim was filed timely was a question of fact for the arbitration panel, which had decided that the claims were properly before it. Without a complete record for review, the court had to give deference to that decision:
While this court does have part of the filings from the arbitration, we do not have the whole file, in particular we do not have a transcript of the arbitration hearing. Thus, without more in the record to support the claim that the demand was made after the 60 day time limit, we cannot conclude that the panel made a material mistake or committed extensive impropriety in deciding the timelines issue. Thus, we cannot disturb the panel’s determination.”
There are two main lessons to be learned from this decision: 1) an arbitration award will be afforded great deference absent compelling evidence that there has been a material mistake or extensive impropriety; and 2) if you are going to challenge an arbitration award, you had better have a complete record, which means you should be thinking ahead at all stages of the proceedings. Of course, having a complete record can backfire as well. For example, if you insist on a complete record of the proceedings and the result is favorable to you, the chance of your opponent successfully challenging the award is increased.
It is important to remember that arbitration is a contractual process. It is a process bargained for by the parties, and courts are reluctant to interfere in that process in the absence of some impropriety that the parties did not bargain for. Here evidence of such an impropriety did not exist, and both the trial and appellate courts refused to vacate the arbitration panel’s award.
Next month we will continue to look at specific cases where the courts have vacated or refused to vacate arbitration awards.
